LSE makes play for collateral management market

MichellePrice

The London Stock Exchange Group (LSE.LN) has weighed into the growing industry scramble to provide collateral management services with the launch of a new service at its Italian settlement house Monte Titoli.

The establishment of a tri-party collateral management offering marks chief executive Xavier Rolet's first major move to expand the exchange's settlement capability, which it obtained through the acquisition of Italy's national exchange group Borsa Italiana in 2007.

The announcement also signals the LSE Group's intention to compete in the burgeoning collateral management sector as part of Rolet's broader strategy to transform the 211-year stock exchange into an international market infrastructure provider.

Monte Titoli, the third-largest settlement house in Europe, has launched 'X-Com' tri-party collateral management for the interbank market, the exchange said yesterday. Tri-party collateral management involves a neutral party, in this case Monte Titoli, acting as an intermediary between the two further parties, in this case two banks, wishing to transfer assets in order to complete a transaction.

For example, tri-party collateral management services could include facilitating securities lending, repurchase agreements, or the management of margin posted by banks to central clearing counter-parties. Monte Titoli will also act as the custodian of the assets for the lifetime of the transaction. The initial implementation phase will focus principally on Italy, although the LSE expects to expand the service into other markets in due course, the exchange said.

Paolo Cittadini, chief executive of Monte Titoli, said in a statement issued yesterday: "The new X-Com service responds to our customers' growing need for diversification of financing tools and efficiency on the markets. This project has a systemic relevance, not only for the entity and quantity of subjects involved but also to support the interbank market."

Collateral is posted against a trade or transaction as a form of insurance should one party default. New collateral-intensive rules, including Basel III, and Dodd-Frank in the US and the European Market Infrastructure Regulation in Europe, will require firms to post more liquid assets against a range of trading activities. This will put a strain on highly-rated and widely-accepted collateral such as triple-A government bonds.

A number of institutions, including Europe's major settlement houses Euroclear and Clearstream, and custody giants JP Morgan and BNY Mellon, are jostling to provide the global banking industry with services that will help them optimise their liquid assets thereby potentially reducing the cost of funding. Settlement houses and custodians, as long-established guardians of assets, are in a strong position to compete in the collateral management sector.

According to a survey conducted by consultancy firm Accenture last September, the global banking industry is wasting €4bn a year through inefficient use of collateral assets. The study, sponsored by Clearstream, found that most institutions do not have a single view of their collateral assets which are often scattered across the organisation.

The LSE's move to expand its settlement house into a collateral management platform marks the latest chapter in Rolet's broader strategy to transform the iconic London bourse into a diversified market infrastructure provider, with a growing focus on post-trade and back-office services.

The development follows the exchange's expansion of its clearing capability with the acquisition in March of LCH.Clearnet, the international clearing house. The transaction has been approved by shareholders but remains subject to regulatory approval.

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